Fri July 11, 2014

When Ikea Raises Its Minimum Wage, Where Does The Money Come From?

Ikea, a company famous for keeping its costs down, recently announced that it would raise the average minimum wage for its retail workers to $10.76 an hour. Why would the company volunteer to pay its workers more?

"By taking better care of our coworkers," says Rob Olson, the acting president of Ikea U.S., "they will take better care of our customers, who will take better care of Ikea. We see it as a win-win-win opportunity."

Win. Win. Win. Sounds like a free lunch. In order to raise wages, the money has to come from somewhere, and there are only so many places it can come from.

Olson assured me that prices would not go up. He also said Ikea would not cut the number of workers.

So what about profits? Olson said profits may fall in the short term, but in the long term the higher wage will lead to better, happier employees, which will lead to higher sales growth.

Basically the company is betting that the pay raise will pay for itself.

David Neumark, a University of California, Irvine economist who is not a fan of minimum wage laws, said this strategy might work. Higher wages make it easier to hire better workers who are less likely to leave and probably a bit happier. But Neumark isn't sure all companies would be better off if they followed Ikea's lead and raised their lowest wages.

In a furniture store, a helpful, better-paid worker may have you walking out the door with a new sofa. But at a fast-food restaurant, he said, better-paid workers don't necessarily sell more hamburgers.

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Transcript

RENEE MONTAGNE, HOST:

It's MORNING EDITION from NPR News. I'm Renee Montagne.

STEVE INSKEEP, HOST:

And I am Steve Inskeep. Good morning. The minimum wage can vary widely depending on where you live.

MONTAGNE: There's the federal minimum wage, which President Obama once raised from $7.25 an hour, to $10.10 an hour. Many states and cities have their own minimum wages, often above the federal rates.

INSKEEP: And now one company is increasing its minimum wage. IKEA recently announced that starting next year, the lowest paid workers in its U.S. stores will make a bit more. It made that move voluntarily. David Kestenbaum of our Planet Money team, wondered why.

DAVID KESTENBAUM, BYLINE: One of the people behind the decision was Rob Olsen, title - Acting President of IDEA U.S. Favorite piece of furniture? Its name is EKTORP.

ROB OLSEN: Yeah, E-K-T-O-R-P. It's a sofa.

KESTENBAUM: Did you put it together yourself?

OLSEN: Yeah, with a sofa there's not much you have to put together.

KESTENBAUM: IKEA employs about 11,000 people in its U.S. stores, and paying those people is one of IKEA's largest expenses. So why would a company, so concerned about keeping costs down that is has customers put together their own furniture - why would IKEA volunteer to pay people more? Was it a PR move? No, he said. Were the workers unhappy? No, he said the company does surveys every year and the employees seem pretty happy. Olsen told me the company did it because it was the right thing to do. He mentioned the IKEA vision, better everyday life for the many people, but he also made this economic argument.

OLSEN: We felt that it was right thing to do and we also see that will benefit us in the long run. By taking better care of our co-workers, they will take better care of our customers, which will take better care of IKEA and you know, see it as a win, win, win opportunity.

KESTENBAUM: Win, win, win. Sounds like a free lunch - which economists are fond of pointing out does not exist. If you raise wages, the money has to come from somewhere - and there are only a few places it can come from. Will prices go up at IKEA?

OLSEN: No, prices will not go up.

KESTENBAUM: Are you going to cut the number of workers relative to what you would have had?

OLSEN: No, we are not.

KESTENBAUM: What about profits? Will the company just make less money?

OLSEN: In the short-term there may be a little less profit, but in the long-term, we see that we'll grow sales at a greater pace which will be better for IKEA in the long-term.

KESTENBAUM: Basically IKEA is betting that if it pays a higher salaries, it will sell more EKTORP couches - so many more couches and kitchens and all the other stuff, that the pay raise will pay for itself. The new minimum wage at IKEA will vary from store to store. David Neumark, an economist at UC Irvine, says this strategy might work - higher salaries do make it easier to attract better workers. Those workers are also less likely to leave and they're probably a little happier

KESTENBAUM: I called Neumark because he's one of those economists who is not a fan of minimum wage laws. He thinks there are better ways to help people. I wanted to know if examples like IKEA changed his thinking. Maybe more companies could increase their profits if they raise their lowest wages. He didn't think so.

NEUMARK: If this was good for companies, why don't they do it themselves? Businesses are really good at figuring out what makes them more money.

KESTENBAUM: In a furniture store, a few well-placed suggestions from a happy worker, and you might be heading home with a new sofa. In a fast-food restaurant though he says, better paid workers may not sell more hamburgers. David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.